Anthony Malakian: Hope in One Hand ...

Deep in the heart of Texas at this year’s Energy Risk USA conference, Dan Berkovitz delivered a speech of hope that would’ve made Barack Obama, circa 2007, proud. Berkovitz, the general counsel of the Commodity Futures Trading Commission (CFTC), gave the audience in Houston a roadmap of the progress the CFTC had made in finalizing rules from the Dodd–Frank Act, and looked at what’s ahead for 2012.

Berkovitz used the word “hope” about a dozen times when speaking about meeting deadlines for things such as the definition of a swap—a long-awaited sticking point for the industry—cross-border applications of Dodd–Frank, clearing requirements, and what a swap execution facility (SEF) should look like.

Berkovitz said the CFTC is looking to create a new rule that relates to the application of clearing requirements of swaps between affiliates of the same company, which will be called the inter-affiliate exception to the clearing requirement.

The Commission is also working on a proposal to provide exemptions for regional transmission organizations (RTOs) for certain swap transactions since the Federal Energy Regulatory Commission (FERC) already regulates those markets.

Finally, while the Commission has finalized rules on position limits, there it litigation against the ruling and the CFTC has received two petitions to modify the final statute: one relating to how inter-agency swaps are aggregated, and one about the use of a swap as a strategic hedging tool.

Overturned
Now consider this: Over the last year or so we’ve seen one finalized rule from the Dodd–Frank Act overturned by an appeals court in Washington DC, while the Volcker Rule deadline for final compliance was moved from July 21 of this year to July 21, 2014. That delay was announced just a few weeks ahead of the original deadline date.

Let’s compound matters: It’s an election year in the US and the buy side has made it patently clear that it is looking for a change in leadership. According to non-partisan blog OpenSecrets.org, part of the Center for Responsive Politics, the hedge fund and private equity industries have showered Republican nominee Mitt Romney with more than $2.5 million compared to less than $700,000 for President Obama, despite the fact that the president has outraised the former Massachusetts governor by more than $200 million, overall.

So with all this evidence of uncertainty, just how aggressively should firms push for tech overhauls? Wall Street is, by its very nature, a speculative, risk-taking entity. There’s reason to believe that President Obama could lose. If that happens, the Dodd–Frank Act could be in trouble. Even if he does get a second term, there are plenty of reasons to think that the force of many of these rules will be dulled.

I recently sat down with BlueMountain Capital Management chief operating and risk officer Michael Liberman about the current regulatory state and how his firm is preparing for the upcoming July deadline for Form PF reporting. For such a major hedge fund with $5.6 billion under management, he didn’t seem in the least bit fazed. Maybe it’s a case of presenting a strong face in front of the media, but I didn’t get the feeling that he was at all worried. 

Another CTO at a $5 billion hedge fund told me that his firm is most concerned about governance issues when it comes to Form PF, and not technology issues. He said many in the industry believe that the Securities and Exchange Commission (SEC) is using this first round of filings as a test that will not be graded as harshly as it will a year from now.

Deadlines
The CFTC’s Berkovitz is hopeful that the regulator will hit its target deadlines, alongside with the SEC. I’m starting to believe that the buy side isn’t just hopeful, but fully expects its regulatory burden to be significantly reduced over the next year. And from what I’m seeing in the market, it’s a good bet.